Factory Overhead Rate Bases. Aqua Furnishings Company, a manufacturer of custom designed restaurant and kitchen furniture, uses job order costing. Actual fac¬ tory overhead costs incurred during the month are applied to the products on the basis of actual direct labor hours required to produce the product. Overhead costs consist primarily of supervision, employee bene¬ fits, maintenance costs, property tax, and depreciation.
Aqua recently won a contract to manufacture the furniture for a new fast food chain that is expanding rapidly in the area. In general, this furniture is durable but of a lower quality than what Aqua normally manu¬ factures. To produce this new line, Aqua must pro¬ duce more molded plastic parts for furniture than it does for its current line. Through innovative industrial engineering, an efficient manufacturing process for this new furniture line has been developed, requiring only a minimum capital investment. Management is optimistic about the profit improvement the new prod¬ uct line will bring.
At the end of October, the start-up month for the new line, and again in November, the controller pre¬ pared a separate income statement for the new prod¬ uct line. On a consolidated basis, the gross profit percentage was normal; however, the profitability for the new line was smaller than expected. Management is concerned that knowledgeable stockholders will criticize the decision to add this lower-quality product line at a time when profitability appeared to be increasing with their standard product line. Gross profit results for the first 9 months, for October, and for November are as follows:

Aqua Furnishings Company Statement of Gross Profit (Thousands of Dollars)
First 9 Months October November Fast Food Custom Fast Food Custom Fast Food Custom Furniture Furniture Consolidated Furniture Furniture Consolidated Furniture Furniture Consolidated Sales.
—
58,100 $8,100 $400 $900 $1,300 $800 $800 $1,600 Direct materials.
Direct labor:
—
$2,025 $2,025 $200 $225 $ 425 $400 $200 $ 600 Forming.
—
758 758 17 82 99 31 72 103 Finishing.
—
1,314 1,314 40 142 182 70 125 195 Assembly.
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558 558 33 60 93 58 53 111 Factory overhead.
—
1,779 1,779 60 180 240 98 147 245 Cost of goods sold.
—
56,434 $6,434 $350 $689 $1,039 $657 $597 $1,254 Gross profit.
—
$1,666 $1,666 $ 50 $211 $ 261 $143 $203 $ 346 Gross profit percentage .
—
20.6%
20.6%
12.5%
23.4%
20.1%
17.9%
25.4%
21.6%
The controller contends that the factory overhead allocation based solely on direct labor hours is inappro¬ priate and that only supervision and employee benefits should use this base, with the balance of factory over¬ head allocated on a machine hour basis. In the con¬ troller’s judgment, the increase in custom design furniture profitability is partially a result of overhead misallocation.
The actual direct labor hours and machine hours for the past 2 months are as follows.
Fast Food Custom Furniture Furniture Machine hours:
October:
Forming.
660 10,700 Finishing.
660 7,780 Assembly.
—
—
1,320 18,480 Direct labor hours:
October:
Forming.
1,900 9,300 Finishing.
3,350 12,000 Assembly.
4,750 8,700 10,000 30,000 Machine hours:
November:
Forming.
1,280 9,640 Finishing.
1,280 7,400 Assembly.
—
—
2,560 17,040 Direct labor hours:
November:
Forming.
3,400 8,250 Finishing.
5,800 10,400 Assembly.
8,300 7,600 17,500 26,250 The actual factory overhead costs for the past 2 months were:
October November Supervision.
$ 13,000 $ 13,000 Employee benefits.
95,000 109,500 Maintenance.
50,000 48,000 Depreciation.
42,000 42,000 Propertytax.
8,000 8,000 Allother.
32,000 24,500 Total.
$240,000 $245,000 Required:
(1) Reallocate actual factory overhead for October and November following the controller’s preference. (Round allocated costs to the nearest $100.)
(2) Present support or criticism of the controller’s con¬ tention, based on requirement 1 results, and include revised statements of gross profit for October and November.